Study: Tax haven use dries up state funds

In its report, PIRG said states are losing that revenue at a time when the 2008 fiscal crisis is still forcing them to make tough budget choices.

“Companies and wealthy individuals that abuse offshore tax havens still benefit from their access to each state’s markets, workforce, infrastructure, security, and public services,” the report said. “But they pay little or nothing for those benefits — violating the basic fairness of the tax system and forcing other taxpayers to pick up the tab.”

The report is just the latest turn in the longstanding debate over how to tax U.S. multinational corporations — a key topic in the broader discussion of corporate tax reform.

Under the current policy, multinationals pay taxes on profits made anywhere in the world, at top corporate rate of 35 percent. But companies can defer paying those taxes until they bring the profits back to the U.S.

Top Republicans, including the leading GOP tax-writer in the House, Ways and Means Chairman Dave Camp (Mich.), have proposed moving to a system that would shield most or all of a corporation’s offshore profits from U.S. taxation.

Advocates of the so-called territorial system say it would encourage companies to bring back more cash to invest in the U.S. One of those supporters — John Engler, the head of the Business Roundtable — said last week that he thought President Obama would be open to such a plan.

But in its report, PIRG said that states should urge the federal government to reject a switch to territorial, saying it would encourage companies to disguise taxes as foreign and move operations out of the country.

In general, PIRG found that states with bigger economies and higher tax rates lost the most revenue to tax havens.

By itself, California lost around $7.1 billion, or about 18 percent of the $40 billion in losses, the study found. New York, New Jersey, Illinois and Pennsylvania rounded out the top five.

To help keep bring in more revenue, the PIRG study also suggested that states could separate their tax laws from the federal system, or force corporations to report the income of the parent company and subsidiaries altogether.

On a conference call discussing the report, Rep. Lloyd Doggett (D-Texas), a member of the Ways and Means panel, said PIRG’s research would be helpful as policymakers continue to debate tax reform.

The administration has sounded particularly interested in a corporate overhaul; Camp recently released a second draft proposal dealing with tax reform. Senate Finance members have also been discussing the issue, with the hopes of releasing a draft set of proposals in the months to come.

On Tuesday, Doggett said that he thought many corporations looked at tax reform as a way to continue to pay a low tax rate while streamlining the code.

He also noted that the year-end "fiscal cliff" deal extended targeted tax breaks that help corporations — a package that passed Senate Finance on a bipartisan basis in August 2012.

“So much of the discussion in the recent fiscal cliff negotiations centered on shared sacrifice that in order to address our budget problems, we needed everyone at the table,” Doggett said on a conference call discussing the PIRG report. “Corporations did not contribute a cent to resolving the fiscal cliff.”